Before you commit yourself to years of auto loan payments, it’s recommended that you take the time to understand what it actually is that you’re paying for. Your monthly payments will not only pay back the original amount you borrowed but also an additional interest fee. It is important to understand the factors that contribute to your loan finance in order to get the best deal for yourself in future.
There are 2 main types of loan—simple interest and front loaded. A simple interest loan calculates the total amount borrowed including interest and breaks it down into equal monthly payments. A front loaded interest loan is less risky for the lender because you pay a greater amount at the beginning which then tapers off as over the period agreed.
The interest rate that you are offered by the finance company depends on a few factors. These include the age of the car and where you live as well as the term (length) of the loan. A longer term loan will generally have a higher interest rate but lower monthly payments. Short term loans have a lower rate of interest but the monthly payments will normally be higher because you are paying the same amount of money off in a shorter payback period. You need to strike a balance between minimising the amount of interest you pay without over stretching your wallet.
One of the major contributors that is used to calculate the interest rate for your loan is your credit rating. Your credit score is affected by many different factors, including how often someone requests a credit report on you. It is always a good idea to make yourself aware of your current credit rating before heading for the dealership. You can obtain a copy of your credit report from a credit bureau.
Be careful not to become too fixated on the interest rate and monthly payment amounts. Although they are important, the single most important figure is the total loan amount as it will be used to calculate the interest due. Always try to keep this figure under as much control as possible. If the dealer sells you any add ons such as warranty or maintenance packages consider paying them up front if you can afford it rather than adding them to the loan and paying interest on them.
The loan you take may not necessarily be financed by the car dealer. There are many options for loans today. In fact, dealer financed loans often have a mark-up on the interest rate and are front-loaded. In addition the dealer will try to sell you a selection of add ons that will increase the total loan amount. Other sources of finance include bank or credit union loans. These normally need a few days to organize but normally you can get a slightly lower interest rate, a simple interest loan and an agreement from the bank that the purchase price reflects current market conditions. You can also tie your car to your home by taking out a home equity loan. This can be a risky financial move and should be given careful consideration. Some Internet research can unearth excellent loan deals online but you should always ensure that the finance company is reputable and financially secure themselves.
One way of reducing the loan amount is by taking advantage of any incentives being offered by a dealer or manufacturer. By doing some research in advance it is sometime possible to unearth a promotion leading to a special interest rate or rebate depending on your circumstances. Some dealers offer 0% finance which can make a big difference to the payments you will make. However, normally the 0% offer will involve a shorter payback period or the disqualification of an alternate rebate. Check all of the small print on this type of offer and watch out for any add-ons that you haven’t requested. Your credit rating will pay a large part in qualifying you for this type of offer.